I have never invested in mutual funds but have direct exposure to equities since the 80s. I have a few questions on mutual funds.

In your fund coverage last week, you had stated that HDFC Top 200 delivered annualised return of 28 per cent over the last 10 years. So this must be the return on the face value. What was the NAV then and what is the return an investor would have got if he had purchased the units in the secondary market?

Secondly, could you compare this return with, say, an investment in Infosys, L&T or Hindalco or any other index stock so that we get a clear picture?

As the markets are very volatile can we sell mutual funds at 9.30 a.m. when the Nifty is up by, say, 100 points and when the Nifty closes down 80 points, then can one square off the mutual fund units under consideration? In other words, can a mutual fund investor make the most of intra-day volatility in markets or is the closing NAV only considered for transactions?

Sudhin Bathija

HDFC Top 200 was launched in 1996. Hence, the 10-year returns mentioned in our fund recommendation are not since launch. It is point-to-point returns between 2002 and 2012. Returns are normally calculated between any two points. It is not necessarily calculated from the face value of Rs 10. The fund’s return since its launch, which was when it was close to its face value, is an annualised 22 per cent.

Moving to your comparison of fund returns to that of stocks, it is noteworthy that an equity fund is a portfolio of stocks. A fund may hold a compact basket of 20 stocks or a diversified portfolio of 80 stocks. To this extent, comparing fund returns with a single stock may not be appropriate.

Your bet on a single stock may really pay off well or turn out to be a catastrophe. For instance, among the stocks that you mentioned, the stock of L&T delivered a good 36 per cent annually, Infosys managed 19 per cent and Hindalco 9 per cent, over a ten-year period. Now while the L&T stock outperformed HDFC Top 200’s return in the above period, what is the guarantee that you would have picked L&T then? And what if you had picked Hindalco instead?

With a basket of stocks, the risks are diversified. But to this extent, your returns too may not be extraordinary. In other words, you may not get the supernormal returns that L&T managed. But then, the chances of your bet going sour in a fund are also lower compared with single-stock exposure.

Moving to your next query, all equity funds make it a very clear objective that they seek to generate long-term capital appreciation. Hence to bet on mutual funds for the short-term is not a good idea. Besides, as you suggested, the NAVs of the funds are not real time. Hence, it is not possible for you to trade on mutual funds by going short.

Even short-term buying and selling, say within a few days may hurt you, given that the NAV values do not move like stocks (as they are a basket) and there are expenses involved in buying and selling units, especially in terms of exit load as well as capital gains tax.

While you can trade in exchange traded funds (ETFs), low volumes in many of the ETFs in India make them less amenable to trade. Besides, you need to have a directional call on the underlying index.

* I am 30 years old. I have a one-year old child. I want to save some amount for her higher education and for her marriage too. I don’t have any savings at present and do not have any insurance policy. I am planning to invest Rs 3,000 a month in mutual funds through the SIP mode. Please suggest good funds.

K Ramesh

It is good to know that you want to start saving for your child. But since you have said that you have no savings, ensure that you save for your own goals, whether it is buying a house or retirement. Do not overlook them in your anxiety to provide for your child.

Take a term insurance policy for an amount that will provide for the future needs of your family in your absence. If you have any liabilities, ensure that the term insurance also covers that. You can also up your term insurance if you have fresh liabilities in future.

As far as your child’s education and marriage are concerned, fix a tentative amount you would like to save.

For instance, if professional education such as engineering requires Rs 5,00,000 today and prices rise (inflation) by, say, 7 per cent a year, you will need Rs 15.8 lakh, 17 years from now, for your child’s higher education. Hence try and fix yourself a financial goal.

Rs 3,000 invested for 17 years, if it delivers 15 per cent per annum, will leave you with Rs 28 lakh at the end of the period. You can consider investing Rs 1,500 a month in HDFC Children’s Gift – Investment Plan and opt for the lock-in until your daughter turns 18. This is an equity-oriented fund with a good track record. It has about a fourth of its assets in debt. This may provide some protection during volatile periods in the equity market. Another Rs 1,500 can be invested in diversified fund Quantum Long Term Equity.

With a bias for large-caps this fund has a good track record of navigating down markets and generating above average returns in rallies. Slowly increase savings, based on the quantum of financial goal. Invest in traditional instruments such as public provident fund and bank deposits as well.

Queries may be e-mailed to >mf@thehindu.co.in

Related Topics